Wal-Mart Stores Inc. plans to launch its wholesale stores by the middle of 2008, reaching 75 cities over the next five to seven years as part of a closely- watched alliance with Bharti Enterprises.
“We will be looking at wherever there is a (existing) wholesale market,” said Raj Jain, Wal-Mart’s president for emerging markets. “They mostly tend to be in bigger sizeable towns, which act as hubs of wholesale to the population.”
Jain was providing the first official contours of the proposed venture with Bharti, which also operates Airtel, India’s largest mobile-services company.
Wal-Mart’s plans have attracted attention and controversy, becoming a lightning rod for those who worry about potential job and income losses among traditional vendors and wholesalers, who form the backbone of India’s current retailing business.
The world’s largest retailer in terms of sales, Wal-Mart is “a few weeks” shy of signing an agreement with Bharti, for a 50:50 joint venture to open “cash-and-carry” or wholesale hypermarkets selling multiple products to businesses and other local retailers, Jain said.
Cash-and-carry is the only format where 100% foreign ownership is allowed in the otherwise heavily restricted $300 billion (Rs12.3 lakh crore) annual retail market in the country. Wal-Mart said it chose to partner with Bharti rather than staging a solo entry into India with its wholesale model because they wanted a “strong local partner”.
Bharti, led by billionaire entrepreneur Sunil Mittal, knows “how to get things fastest in a country that is very complex in nature”, said Jain in an interview, part of a new, coming-out strategy for the retail giant. It has avoided commenting on its plans despite lots of negative publicity.
“Whenever there is a change or whenever people are moved out of their comfort zones there will be protests,” said Jain. “There will be certain elements who rightly or wrongly would like to demonstrate,” he added.
As part of its strategic relationship with Bharti, Wal-Mart will manage the supply chain and logistics of Bharti’s own retail network that is also being honed by Mittal. Jain said Bharti could use the Wal-Mart brand name for its own retail stores, which cater to individuals. That format is barred for Wal-Mart and other foreign multi-brand retailers.
Jain said Wal-Mart’s wholesale stores will be in the range of 50,000-1,00,00sq. ft and the JV is expected to employ up to 10,000 people. He declined to give details, such as investments or where the first store will be opened.
Edited excerpts of Jain’s interview with Mint:
Everybody is talking of this booming market, but retailers are saying it might not be much actually. How large do you think the market for your form of retailing is?
I think it would be in the order of $200-220 billion.Having said that, out of this $220 billion, 50% is in rural areas and I cannot see how a cost-effective model can service that market—at least for the next decade. Because these are people living in remote villages and it would be almost impossible to be able to serve them at this point of time, and they don’t have the economic power to move out and shop on a day- to-day basis. So, effectively the market is probably about $100 billion right now, of which half is in very small towns of 10,000-12,000 people.
Where can retailers go?
Absolutely. They can go, but are those towns ready to take organized retail in terms of infrastructure and so on? I would say, not in the next five years. The infrastructure is so poor, that even to get merchandize there and effectively service them would be difficult. So, if you take out that half, then you are left with about $50 billion and that is the size of the pie.
If these are problems for retailers, they are problems for you as well, so where do you plan to go? In metros and big cities?
We will be looking at wherever there is a wholesale market…the wholesale channels have evolved over hundreds and hundreds of years in India. They tend to be in bigger towns and there is unlikely to be wholesalers in small towns. It will be sizeable towns, which act as a hub of wholesale to the population.
Is Bharti bound to sourcing only from the joint venture wholesale stores?
The front-end retailing is a 100% Bharti Enterprises’ venture, called Bharti Retail, and they will own, run the stores.. they can do whatever they want. They can source if they desire. If we are competitive, they can source from us and, if we are not competitive, they are going to source from somebody else.
Will Bharti have access to the Wal-Mart brand (name) for these stores?
They have requested us for management, system, practices and technology to be able to run those stores. They believe that because they are not retailers, they would like to learn it from somebody and they’ve asked Wal-Mart if we would be interested. And we are interested in providing them. So, we will, under a technical licence agreement, provide them the technology, management systems and training required to run the stores. If they want to take our brand and put it on their stores, we will evaluate their request and we are open to it.
Have they approached you for using the Wal-Mart name?
They have expressed interest. They are doing a market research to understand whether they want to use our brand or not. Secondly, and more importantly, we have also asked them for details on how they would like to use our brand because we would not like our brand to be put on every little shop that they plan to open. We want to make sure our brand’s personality is protected when they use it.
So is it possible they might use it for larger formats? Hypermarkets?
It is possible because Wal-Mart is a brand which stands for some parameters.
One of the issues facing retailers is real estate. How does it fit in with deep-discount retailing like yours when real-estate prices are skyrocketing in India?
It’s a challenge for every retailer. It’s a challenge for us, both in terms of our distribution centres, processing centres and cash-and-carry stores. What we are looking at is working with real estate companies to have long-term partnerships that will allow us to be able to lease out properties at rates we can afford... to do our kind of business.
Is there a chance that high real estate costs might end up making your business even lower margin, not that this is a high margin model any way?
It’s a delicate balance. I can’t predict how the margins would flow out in the end. The disadvantage of India is the real estate (costs) are high... The advantage for India is that its labour costs are low and the advantage of India is the population is very dense so you can sell a lot per square feet. So, it’s a complicated equation. Real estate is important but other components are working favourably.
Kishore Biyani of Pantaloon Retail (India’s largest retailer) says you cannot sell bananas any cheaper in India. How do you respond to that?
I think Kishore Biyani is probably right in saying so. If you look at the point of sourcing for a week or a month, it’s absolutely right that the mandis (local wholesale markets) in India are the probably the most cost-effective places to buy. But, if you look at it from the point of view of over a period of a year or two... from the point of view of value-added bananas....if you look at the entire chain and how you can service that chain so that you can segment your consumers. There are high-end banana consumers and there are low-end banana consumers.
How much are you planning to source from China?
I personally feel China and international sourcing will be less than 10%
If India allows FDI in retail, say one year down the line, is there a provision for you to convert your joint venture for front-end stores as well?
If FDI is allowed in India, and we have been openly saying the Indian government should consider that, we will for sure want to set up retail stores.
Separately or with Bharti?
We haven’t thought of that possibility now.
But you must be ensuring in your current agreement with Bharti you aren’t disadvantaged in any way, should the rules change.
We are talking those things but haven’t finalized anything yet.